Bond yields spike as Kwarteng unveils tax cuts, quantifies freeze of energy prices

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Bond yields spiked on Friday as the U.K. government cut a host of taxes and for the first time quantified the cost of capping energy bills, saying it will cost £60 billion over the next six months.

The so-called mini-budget speech from Chancellor Kwasi Kwarteng outlined a plan to scrap corporate tax hikes, cut the top rate of personal taxes and lift a cap on banker bonuses.

The yield on the 2-year gilt

shot up 37 basis points to 3.87%. The yield on the 10-year gilt

jumped 33 basis points to 3.83%, continuing a meteoric ascent from 2.6% not even a month ago.

The pound

moved off its lowest level of the day of $1.1151, though still near the lowest levels since 1985.

“The good news is that the income tax cuts will boost revenues for retailers and consumer companies and the stamp duty reduction should lead to a re-rating of housebuilders as investors price in a more robust housing market,” said strategists at Liberum Capital led by Joachim Klement.

“The bad news is that the tax cuts will materially increase the government deficit given a lack of spending cuts to finance them. This will put additional pressure on sterling and increase import price inflation. The Bank of England may react to this with another outsized rate hike in November and markets will price a higher risk premium for long-dated gilts which is bad for growth stocks in the near term as long as this repricing happens.”

Here are the key provisions.

  • Cuts the basic personal tax rate to 19% from 20%, and eliminates the top tax rate of 45%

  • Cancels the national insurance hike of 1.25 percentage points from Nov. 6

  • Eliminates a planned increase in the corporate tax rate of 25%, keeping the rate at 19%

  • First-time buyers will only pay stamp duty on homes above £425,000, up from £300,000

  • Freezes taxes on alcohol from February, it what estimates is worth £600 million annually

U.K. builders including Persimmon

advanced after the stamp duty news. The broader FTSE 100

however fell by over 1%.

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